Solving “more month than money” puzzle

How can people tap earnings they've already accrued when payday won't come for a week or more? New alternatives have been developed.

Microeconomics and innovative technologies are redefining the U.S. workplace and workforce. Yet according to a recent PwC study, about 70% of households still live paycheck to paycheck—with financial disaster just one broken air conditioner or hospital visit away.

It’s not surprising that a March 2017 MetLife survey found 49% of employees are stressed and anxious about their financial wellbeing. Until a few years ago, workers had few options to bridge the paycheck cycle gap—payday loans, cash advances on credit cards, and overdrafts. Those options all entail high interest or significant fees—or both—that can drive vulnerable borrowers even further into debt.

Now, a handful of innovative companies have targeted the paycheck-to-paycheck trap. They offer programs that let employees access money they have already earned but not yet been paid.

Two firms, PayActiv and FlexWage, work solely through employers. They are shaking up the conventional payroll landscape. A third player, ActiveHours, offers employees direct access to earnings without employer participation required, although Sears and Uber now offer it to their workforces.

The FlexWage model

FlexWage, launched in 2010, is believed to be the first non-loan earned income access program for employees to hit the market. Frank Dombroski, founder and CEO, applied his experience managing JP Morgan’s Payment Solutions business to the challenge of offering banked and unbanked employees access to between-payday accrued cash.

The core of the FlexWage solution is WageBank, an employer-sponsored financial wellness benefit.

“Our system integrates with the employer’s payroll and time-labor systems, which allows us to track and value employee net pay throughout the pay cycle,” Dombroski explains. “The employer establishes policies within our system that manage the percentage of net pay they will make available, and how frequently an employee may access their pay early.”

The goal is to give employees an alternative to payday lending and other high-interest, high-fee transactions.

Funds are transferred to a paycard—a method chosen for immediate funding (versus ACH one-to-two-day transfers) and the fact that the unbanked don’t have direct deposit accounts.

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“This allows us to serve both banked and unbanked segments,” Dombroski says.

Employees use FlexWage’s mobile or web app to see their accrual balance, and can transfer available money instantly to their card. Dombroski emphasizes that the funds are provided by the employer who owes the employee the pay. FlexWage does not advance the money and get reimbursed on payday.

The PayActiv model

PayActiv takes a different approach to the “more month than money” problem, prompted by Safwan Shah’s own experiences as a cash-short grad student.

“You’re low income, and you live within your means, but you’re not financially resilient,” says Shah, president and CEO. “Who decided you get paid every two weeks?”

Harnessing his expertise in payment and transaction systems, Shah created a product intended as an employer benefit that would let full-time employees tap into accrued pre-payroll earnings.

Employers pay no fee for the program. Employees pay just $5 for each cash advance, which is delivered to their bank accounts or payroll cards. Alternatively employees can have payments sent directly to a vendor to cover a bill.

Good deal for workers?

Consumer advocates are cautiously optimistic about these alternatives to the deadly debt spiral in which many low- and middle-income employees find themselves trapped.

“They seem on the surface to be a tool that helps people keep up with their expenses better than they might have done when they had to wait for a paycheck,” says Bruce McClary, spokesperson for the National Foundation for Credit Counseling. “It’s encouraging if you have someone who is unbanked and the product requires them to open a bank account or participate on some level.”

However, McClary adds, if such programs are only offering the opportunity to dip into a paycheck without waiting for payday, it may not be enough to help employees focus on better money management habits.

The companies appear to be making serious efforts to live up to claims of promoting financial wellness.

In 2016, FlexWage partnered with New York’s Neighborhood Trust to develop and test WageGoal. Aimed at helping lower-income workers access earnings between paydays, the program also emphasizes saving and achieving a better understanding of how to use their money. In addition, Neighborhood Trust offers credit counseling that could be bundled with WageGoal.

PayActiv representatives help set up savings accounts, demonstrating how saving just a few minutes’ worth of wages over time becomes a way to pay debts or family expenses. They also guide users to credit counselors for one-on-one advice.

Good dovetail with banks?

FlexWage and PayActiv report seeing an increased interest in their programs from financial institutions, both for their employees and as one more weapon in the business services arsenal.

FlexWage is currently in discussion with several large banks about offering WageBank as a product enhancement to pay card and bank at work programs.

“We have several banks as reseller channel partners, including a recently launched partnership with MetaBank,” Dombroski says. The company also set up a program for the employees at Boiling Springs Bank in New Jersey, and is an integrated partner with ADP, which enables ADP clients to launch the service with no effort.

Three credit unions, including Justice FCU, offer PayActiv to their own employees. But Shah sees big potential in banks’ using PayActiv to bring in new business.

David Frady, EVP of Hancock Holding Company’s Hancock Whitney Bank, with $28 billion in assets, was intrigued by PayActiv as a low-cost way to provide value-added services to large employers. “How do we compete against those very large banks?” he muses. “We need to be nimble, we have to be innovators.”

He approached a CEO friend heading a large hospital with 4,000 employees, to ask if he saw abuse by payday lenders and lost productivity. The hospital executive acknowledged this was a major problem, and agreed to the bank’s proposal that he try PayActiv at two locations.

“The result was not easily quantifiable,” Frady says, “but [he] said that turnover has been reduced, which does save them money.”

Helping employees helps employers, and that’s all to the good.

“But if we pick up one new hospital because of this,” says Frady, “it’s even better.”